A friend on Facebook pointed out the excessive spending and the approaching deficit in California. I thought I would do a little "back of envelope" calculations on the federal spending problem. This has been a concern of mine for decades. The chickens could come home to roost next Tuesday, or it could take 20 years. As Herb Stein said in the 70's, "If something can't continue, it won't."
While these numbers are very suspect since we are on the crest of a recession and the covid spending is winding down, we can roughly do the numbers. What are the numbers?
Spending is 6.2 trillion. This includes 1.2 trillion for social security and 760 million for Medicare. Naturally as I am 68 I would opposite cuts there. A joke, but still a true statement form me that shows the problem. Politically such cuts seem unlikely anyway. So other spending is 4.2 trillion. The estimated deficit is 1.3 trillion. So to balance the budget we need a 30% cut.
But I left something out. Interest of federal debt is 400 billion a year. This is headed up as interest rates rise. So assuming the US doesn't repudiate its debt the ratio is 3.8 trillion with a deficit of 1.3 trillion or a cut of 34%.
We are doomed. I was going to use a different word, but this is a family blog.
Yes, I am saying it is not going to be that bad. However, there is more risk from governmental action than there is from the virus for the average person.
First, this will dramatically increase the deficit. Eventually, the deficit will destroy the country. How soon, you ask? No one knows. I have been saying that it will not be this crisis but the next one, maybe even the one after-14 years or so. But I was not expecting the unexpected, the black swan. I doubt it, but this could be the big one:
A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.
The Corona virus seems to qualify.
What governmental action am I expecting?
There will be a mandatory quarantine and widespread shuttering of businesses in about a month. This will happen whether or not it is a good idea. Think about it from the government perspective. If the government does nothing, and there is a disaster, the government will be blamed. If the government has some sort of quarantine, and nothing happens, then the government will say, "See it worked!" If there is a crisis, and there was a government shutdown of businesses, then they will say, "See, it would have been even worse without the restrictions." The government could even be right about either of these outcomes. It might actually be the right thing to do.
While a better alternative is self quarantine, or social distancing as it is called:
Social distancing is a set of nonpharmaceutical infection control actions intended to stop or slow down the spread of a contagious disease. The objective of social distancing is to reduce the probability of contact between persons carrying an infection, and others who are not infected, so as to minimize disease transmission, morbidity and ultimately, mortality.[1][2]
Social distancing is most effective when the infection can be transmitted via droplet contact (coughing or sneezing); direct physical contact, including sexual contact; indirect physical contact (e.g. by touching a contaminated surface such as a fomite); or airborne transmission (if the microorganism can survive in the air for long periods).[3]
Social distancing may be less effective in cases where the infection is transmitted primarily via contaminated water or food or by vectors such as mosquitoes or other insects, and less frequently from person to person.[4]
One of the earliest references to social distancing dates to the seventh century BC in the Book of Leviticus, 13:46: "And the leper in whom the plague is...he shall dwell alone; [outside] the camp shall his habitation be."[5]
Historically, leper colonies and lazarettos were established as a means of preventing the spread of leprosy and other contagious diseases through social distancing,[6] until transmission was understood and effective treatments were invented.
As I am 65, I will be doing this more and more as the crisis expands. Everyone should. Do not have any doubt the virus will spread. My church canceled services for the next two weeks and I predict this will be extended until the summer. I had already not gone for two weeks for this reason.
This is happening in Italy right now. No one is to leave their homes except to go to the pharmacy or the grocery store. Unless you are living in the forest, you already know that there are shortages in the supermarkets in the US. My hardware store has no masks that are effective for virus protection, and we can't order any. While buying more than you would need for the next week is prudent, do not be a jerk. Soon it will be forbidden to be a jerk.
The shutdown is coming to a country near you.
While I do not expect the banks to close, it might be advisable, if you are able, to withdraw some cash from savings. Even going to the bank might not be a good idea at some point in the future.
Things seem to be going well, at least that is what Trump is telling us. Before his election, (one has to wonder if he actually expected to be elected), he said the obvious truth that the numbers are fixed in order to hide that fact that things are not going well. Since he is now "in charge," he is singing a different tune.
There has not been as much economic expansion as the numbers indicate. Inflation is not 2 or 3 percent, it is higher. The books are being cooked. I do not think that the very high estimates you read in the alternative economic press of inflation at 7 or 8 percent are right either, they seem too high. Trump understands this, as a real estate guy he lives by the numbers. But now that it is in his own interest not to point it out he won't. He is a recent politician, but he is still a politician.
It is like the average person is stuck in a scene from Alice In Wonderland. So says the Red Queen:
“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
Confused? You are not alone. There are several reason why I am making contradictory predictions. First, this is the way the prophecy game works. You make contradictory predictions and only point out the ones that ended up correct. There is even a Twilight Zone episode about this.
But I am following my usual practice of having my even number predictions not being serious. So I do not expect a large increase or decrease in the markets. But either of these options is possible. With the expected repatriation of overseas money legally, but immorally, placed/left overseas, there will be a lot of investments and stock buybacks. The reduction in the corporate tax rates will also increase corporate profits. This seems an unlikely outcome as the rate of corporate profits is the highest in modern history. But nevertheless it is what will probably happen. This could mean another 30% increase for this year like last year.
Since the stock market is actually higher in relative terms than it was in 1929 before the great depression, one would think that the market will crash. One would be wrong. I still can't believe I am saying this. There will not be a crash for several years. Since the longest period without a recession is 118 months and we are in month 114, this prediction seems unlikely. But looking at the madness that is Japan, the US has a long way to go before the fiscal madness gets out of control. (It is already out of control, but the bubble still has a long way to go.) I think that the stock market will go up slightly next year, prediction 1.
5. The 1.5 trillion estimated deficit increase that will be the consequence of the Trump tax cut will not even cause a hiccup in the markets. No one will care.
6. Krugman, since there is a Republican in office will continue to prediction dire consequences, and he will continue to be wrong, as he was when he predicted that the internet would not have a significant impact on business and his prediction that the Trump stock market would be bad. The prediction biz is tough.
7. The real estate market in Southern California is nuts. If my family had kept any of our family homes from the 60's and 70's, I could sell it and retire to Costa Rica and live the live of leisure. One would think this would mean I am predicting a crash. I am not. Everyone seems to be buying houses and then renting them out. Many rentals on the market are in this category. As long as interest rates are low, this will continue. I do wonder how many of these new landlords are committing loan fraud by claiming they will live in the unit.
8. Bitcoin will rise to $50,000.
9. There will be no evidence that Trump colluded with anyone, but there will be a lot of noise about it. There will be charges, but the charges will have nothing to do with Russia. I do not think one can be in business and not violate some law somewhere. For example, if a business charges less than the competition, they are trying to monopolize and drive the competition out of business; if you are charging the same amount, then you are colluding; if you charge more, then you are using your market position to cheat the consumer. You can't win. To channel Jan Brady from the Brady Bunch, instead of "Marcia, Marcia, Marcia." It will be "Russia, Russia, Russia."
10. No one will care that no evidence will be found and Trump will still be declared guilty in the court of public opinion. I advise that everyone who can should get out of debt. I am trying to do that. But it is tempting to just go out and buy the tulips. I will be smart enough to know when to sell. Right?
As Trump himself said during the election, no matter who is elected, the next president will have to deal with an economic crisis. Trump used the adjective "massive." I think it will happen this year or early 2018. I predicted this in 2014. Of course I could be wrong and there are a number of things that might delay it. But unless the business cycle has suddenly been abolished, it will happen. The only question is when and how bad it will be.
Trump's tax plan might delay it as massive tax cuts will be a strong, but temporary, stimulus. But the best outcome for Trump is for the slump to come sooner rather than later. Unfortunately, massive tax cuts and spending increases would delay the inevitable, and make it worse. Some are predicting that the recession will be delayed until 2019.
My update on my 2014 prediction is that it will not be as bad as 2008, but there are plenty of things Trump could do to make it a lot worse. I know the perception is that I am pro-Trump, but in fact, it seems likely that Trump will screw this up badly. I do agree with his policy not to have a war with Russia, and stop mucking around in other countries, but beyond that I do not agree with him.
Here is David Stockman, Reagan's director of OMB, Office of Management and Budget, on the coming crisis. I am not as pessimistic as he is, but I think he is right.
Friday, November 18, 2022 at 5:30AM 
